The UK could be in for an even bigger cost-of-living crisis if we don’t find ways to allow people to increase their pension contributions, Royal London has warned.
Royal London commissioned Oxford Economics to produce a report exploring the impact of higher contributions to workplace pensions.
It found that, despite the success of auto enrolment, only 40% of households with a defined contribution (DC) scheme will have the savings needed for a ‘moderate’ standard of living in retirement by 2040.
The report evaluates potential reforms that could be implemented to increase minimum contributions, and the effect this may have for households and the wider economy, both short and long term.
Royal London director of policy Jamie Jenkins said: “Automatic enrolment has undoubtedly been a huge policy success, reversing the decline in workplace retirement saving that started almost half a century ago.
“However, it remains unfinished business, with contribution rates at a level that will still leave many people unable to afford the standard of living they aspire to in retirement.
“People and businesses are facing many financial pressures at the moment and now isn’t the right time to increase contributions, but any reforms are likely to take many years to implement, so we should start planning now.
“Failure to do so could lead to a much bigger cost-of-living crisis in the decades ahead as today’s younger workers reach retirement.”
Jenkins acknowledged that “now was not the right time” to increase pension contributions because of the economic climate.
However, he stressed that it was important to start creating a plan as it will take “decades and not years to get there”.
Oxford Economics director of economic consulting Henry Worthington, added: “Our latest analysis finds that many households fail to save adequately for retirement and that higher pension contributions can improve the adequacy of pension savings.
“However, we also show that poorer households may find it challenging to afford higher pension contributions ― an important consideration for any potential policy reform.
“In addition, the analysis highlights the potential boost to economic growth from higher pension contributions.
“By 2040, UK GDP could be £0.4 to £7.4bn higher, compared to our baseline.”
Any investigation into why so many people aren’t adequately funding their retirement pots should start by listing the reasons why. Could a few of them be:-
1. Over-complexity of the pensions framework? People are naturally wary of what they don’t/can’t understand, so why not truly simplify the rules? Successive governments continually tinker and meddle with the rules governing retirement savings, which is a major turnoff. As a friend said to me many years ago: How can you plan your retirement savings (or any financial) strategy when the government moves the goalposts every few years? Stability is crucially important, yet the powers that be just don’t see it.
2. A non-index-linked cap on the value of retirement savings that they can accumulate without incurring tax charges? Studies have shown that without index-linking the LTA will affect a steadily increasing number of savers The current government may have announced removal of the LTA altogether, but Labour has pledged to restore it, which is hardly an incentive to lock away money in a retirement savings plan, even with tax reliefs.
3. Removal of the facility to include a measure of life cover in a retirement savings plan? (For that, we have that miscreant Jeff Rooker to thank). Why not restore it, subject to a minimum level of ongoing contributions to retirement benefits?
4. Removal of contributions insurance (WoP)? For someone who suffers long term loss of earnings capacity on account of sickness or accident, that could be a massively valuable supplement.
5. Lack of regulatory oversight of the suitability for most people of SIPPs, all too often investing in all sorts of wildly off-piste toxic garbage? In my opinion, SIPPs are a niche product, suitable (in general) only for HNW/experienced/sophisticated investors, yet they’re commonly over-hyped and mis-sold to all and sundry. The FCA should but has so far failed dismally to redefine the suitability parameters for SIPPs.
6. Lack of any idea amongst consumers as to what their target fund at their hoped-for retiring age should be? This is an area in which advisers need to up their game. I remember several years ago writing to a client giving him this figure (and explaining how I’d arrived at it) and he (almost immediately) increased his contributions substantially. He now had a figure to aim for.
7. Lack of Government support during sustained periods of severely depressed annuity rates? In such circumstances, the government should issue special enhanced yield gilts, available only to annuity funds and Registered Pension Schemes.
There’s more, but these are the few that spring to mind.
And another thing ~ the only reason AE has been a success is that it’s compulsory and firms who fail to set up such a scheme get hit with a nasty fine. On that basis, how could AE be anything other than a success?